What Are Layer 2 Solutions? A Simple Introduction

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After Vitalik Buterin’s recent tweet regarding the “success” of layer 2 solutions, a new wave of interest started once more around the topic of blockchain scalability. Layer 2 solutions are an implementation on the blockchain that solves the issue of scalability — well known primary blockchains like Bitcoin and Ethereum face the issue of network congestion, high fees, and (comparatively) low transaction-per-second (TPS) capabilities.

The low TPS is a result of necessary trade-offs to maintain the security and decentralized aspects of the network; it’s often called the “impossible triangle” as increasing one aspect would involve a compromise with the other (e.g. one could sacrifice security or be more centralized as a blockchain in exchange for higher TPS). Considering that e-commerce powerhouses alone could process as much as 540,000 transactions per second (as in the case of Alibaba’s 11.11 sale), the technical limitation would prevent the widespread adoption of cryptocurrencies for many use cases.

How do layer 2 solutions help?

At a fundamental level, most blockchains prefer to be more secure and decentralized as that is the core sell behind the technology. This means that TPS is sacrificed and the overall raw output capability of a blockchain is low. However, layer 2 solutions have been touted as a potential solution to this problem for years; they work by recognizing that some transactions do not need to be “fully decentralized or secured”, and batch or move these transactions to a “secondary processing plant” — such as being processed entirely off the blockchain.

These bring about numerous benefits for the entire ecosystem; specific transactions can be processed differently and in a manner that befits the needs. For instance, low-value transactions of less than a few cents could be processed with less security as it is unlikely that a hacker would waste time and money on attacking these low-value transactions. Transactions that need to have low fees but are not urgent can be batched together and processed in such a way so as to reduce the network fee involved.

Here are some examples which should help one understand the solutions better:

  1. A node could wait to batch transactions of a non-urgent nature to be processed together off-chain before broadcasting it to the network.
  2. A dapp with non-essential, low-value computations could conduct specific smart contract computations with a smaller set of validators or trusted nodes, rather than require the validation of the entire blockchain network, and only broadcast the final end state or result to the rest of the network.
  3. Mini-blockchains (known as “sidechains”) with more centralization or less nodes (depending on the purpose) can be used to process assets or transactions outside of the main chain in a secure and faster manner, before being moved back to the primary chain to achieve “finality”. This allows for the final output to receive the full benefits of security on the main blockchain while benefiting from the processing speed of the sidechains.

Let’s break down a few of the major breakthroughs mentioned in Vitalik’s retweet to show how these layer 2 solutions are being implemented:

  1. Starkware’s zero-knowledge layer 2 solution is live. Zero knowledge is a way of sharing information where the information itself is not revealed publicly, but the information is known to be shared correctly and known to be provably true. Starkware’s implementation would mean that computation of private inputs (such as personal data) can be done off-chain, without needing to reveal these sensitive inputs to the rest of the blockchain, while still having them verified on-chain.
  2. Loopring’s ZK-rollups will be live in June. ZK-rollups are a combination of batching of transactions and zero-knowledge proofs, and Loopring’s implementation, in particular, helps to bring about decentralized exchanges that use very low gas fees and high transaction speeds while maintaining a strong level of security.
  3. Tether’s announcement to integrate with the OMG network (formerly OmiseGo) is interesting as Tether is one of the biggest USD stablecoins on the market. Moving to the OMG network, which uses a layer 2 solution known as Plasma, allows them to lower fees and improve transaction speeds, something which is important to them as Tether has one of the highest transaction volumes in the world.
  4. Matic Network is another plasma-related implementation that has recently gone live, utilizing Proof-of-stake for its sidechains with an added focus on having user-friendly UX in the sidechain to mainchain transition.
  5. DharmaOptimism, and Fuellabs who are developing an implementation of rollups known as Optimistic Rollups (ORU) integrate their independent layer 2 solutions for interesting use cases (Dharma open sourcing their own ORU code, Optimism working with synthetix exchange protocol and Fuellabs being integrated for the newly announced Reddit tokens)

Although it is difficult to say if widespread adoption of layer 2 protocols will come anytime soon, the practical implementation of them in real-world contexts are definitely a step forward — just 4 to 5 years ago, these solutions were only being discussed and yet to be available anywhere in practice.

We believe that the next 10 years will see huge growth and transitioning from traditional technologies to blockchain solutions using the widely available layer 2 options to come — the ecosystem will only get bigger from here. Concurrently as the industry works on improving the technical infrastructure and foundations of blockchain technology, check us out at Oobit.com where we are developing solutions addressing the user-end problems facing cryptocurrencies today!

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